China's PMI Disappoints, US getting more Serious about Deploying SPR

Overview: The poor Chinese March PMI and talk that the US could tap its strategic oil reserves by as much as one million barrels a day for six months have rippled through the capital markets.  After the S&P 500 snapped a four-day advance yesterday, equities in the Asia Pacific region may have been on the defensive today, but sub-50 boom/bust reading in China took a toll, which only South Korea and India among the large bourses were able to escape. European markets are softer, while US futures are recovering from yesterday's losses.  US and European 10-year benchmark yields are mostly 3-6 bp lower.  The dollar is trading higher against most of the major currencies.  The Scandis and dollar-bloc currencies are bearing the brunt of the losses, with the Norwegian krone off more than 1.6%. Emerging market currencies are mixed.  Central European currencies are underperforming.  Gold is off around $7 and is in the $1920-$1934 range.  Oil, as one would expect, fell (~6%) on the possibility of a substantial draw down of US reserves, but May WTI is holding above $100 a barrel, even though earlier this week it ahead slipped briefly below $98.50.  US natgas is off about 1.5% after gaining 5% yesterday.  Europe's natgas benchmark is up about 3.7% after an almost 9% gain yesterday.  It is up more than 20% this week.  Iron ore is a little higher today after rising almost 3.5% yesterday.  Copper is threatening to snap a three-day advance.  May wheat is little changed ahead of the USDA planting update report.  

Asia Pacific

China's March manufacturing PMI fell to 49.5 from 50.2.  The non-manufacturing PMI fell to 48.4 from 51.6.  Both were weaker than expected.  The composite now stands at 48.8, down from 51.2 in February.  As disappointing as the report was, the situation is worse because the survey closed a few days before Shanghai was locked down.  It did catch the shuttering of Shenzhen.  The weakness of the report fans expectations for easier monetary policy and other initiatives to support the economy.  A separate report indicated that the issuance of special bonds by the provinces set a record pace in Q1 (CNY1.25 trillion).  The money is thought to help fund infrastructure spending in Q2.  

Japan's February industrial output rose a meager 0.1%.  The median forecast in Bloomberg's survey looked for a 0.5% gain.  This pared the year-over-year gain to 0.2%, not 0.8% that had been expected.  That March Tankan will be released the first thing tomorrow and is expected to also reflect the deterioration in sentiment.  The BOJ's operations and the decline in US Treasuries helped push the 10-year JGB yield slightly below 0.21% after briefly poking above 0.25% earlier this week.  The central bank indicated that next quarter it will boost the amount of 1-10-year bonds it buys.  It shaved the amount of 10-25-year bonds will buy at a time but will increase the number of operations over the quarter.  The BOJ's balance sheet will grow.  The BOE has already begun shrinking its balance sheet.  The Bank of Canada indicate it will do the same in a couple of weeks and the Fed is expected to announce its intention at the net FOMC meeting in May.  

The dollar found support ahead of JPY121.10, which is the (38.2%) retracement of the rally since March 4 that began from around JPY114.65 and peaked this week slightly above JPY125.00.  The momentum indicators are rolling over,  but we expect a period of consolidation rather than a trend-reversal.  Australia reported a surge in February building approval (43.5% vs. median forecasts in Bloomberg survey for 5%, but a volatile series to be sure) and it may build a new port in Darwin after current facilities had been leased to China.  The Aussie was turned back yesterday after approaching $0.7540, which has repeatedly capped it in recent sessions.  The week's low was a little below $0.7460.  A break would initially target $0.7400 and then, possibly, $0.7350.  The greenback fell to a three-week low against the Chinese yuan a touch below CNY6.34.  The PBOC set the dollar's reference rate a softer than expected (CNY6.3482 vs. CNY6.3494, according to the Bloomberg survey). Note that the mainland markets will be closed next Monday and Tuesday for a national holiday.  


Following the surprisingly strong Spanish and German March CPI reports, the French reading was comparatively tame. The harmonized version rose 1.6% in the month, a tad more than expected.  The year-over-year rate rose to 5.1% from 4.2% and was ironically stronger the median forecast in Bloomberg's survey for 4.9%.  A 25 bln euro measure to cap electricity and natgas prices, and offer a rebate, reduced measured inflation by 1.5 percentage points, according to INSEE.   Italy was the only one of the Big Four in the EMU to report lower than expected price pressures.  The harmonized measure rose by 2.6% instead of 2.8% on the month, and 7.0% instead of 7.2% year-over-year. In February, the year-over-year rate was 6.2%.  The eurozone aggregate figures are due tomorrow. 

Separately, France reported disappointing consumption figures.  Consumer spending rose by 0.8% in February.  Economists expected a rise of a little more than 1%. On top of that, the cutback in January was revised to 2.0% from 1.5%.  Note that the first round of the French presidential election is on April 10.  The pattern is for no candidate to win in the first round, forcing a run-off (April 24) and voters to unify behind the "establishment" candidate over Le Pen.  

After German Chancellor Scholz talked with Putin yesterday, the conclusion was the Moscow was backing off of its earlier demand to be paid in roubles for its gas.  Meanwhile, some reports indicate that talks between Ukraine and Russia may resume tomorrow.  We continue to believe Russia will secure military objectives the separatist regions before negotiating more seriously.  Also, some reports indicate that Georgia's breakaway region in South Ossetia may seek to join Russia.  This seems to be the idea in the separatist regions in Ukraine as well.  

The euro initially extended its recent gains to reach $1.1185, its best level since March 1, before reversing lower to almost $1.1110.  There are two sets of expiring options to note today.  The first is for nearly 2.15 bln euros at $1.12.  The other is for 1.55 bln euros at $1.11. Yesterday's low was slightly below $1.1085.  Sterling is sidelined.  It is trading quietly in a narrow range (~$1.3110-$1.3150).  It is hovering around unchanged levels (~$1.3130) in late morning turnover in the UK. If there is to be a range extension in North America today, we favor the upside, but see the $1.3175-$13200 as the cap.  Lastly, note that the Czech Republic is expected to lift the repo rate by 50 bp to 5.0% today.  The risk may be on the upside.  


We have argued that Biden administration has been thinking too small in its previous two efforts to draw down its Strategic Petroleum Reserves if it wants to have more impact on energy prices. In November it announced a 50 mln barrel release and earlier this month, 30 mln barrels.  Surely, these are the conditions that the SPR was created for.  In the past, sometimes, Washington would agree to sell some of the oil for budgetary purposes.  As of March 25, the US stockpile was estimated at almost 570 mln barrels.  Reports suggest that under consideration is a 180 mln barrel draw over six months, or about 1 mln barrels a day.  Ideally, it would be a coordinated effort with other countries.   As we noted yesterday, there is strong correlation between the change in oil prices and the change in inflation expectations as expressed through the 10-year breakeven rates.  OPEC+ meet today and are unlikely to boost their output.  On the other hand, some reports suggest that Washington may allow a US-based oil company to speak directly with the Maduro government in Venezuela, to ostensibly prepare for a lighter sanction regime, which officials deny is currently under consideration. 

Ahead of tomorrow's jobs report, the US reports February income, consumption, and deflators.  Personal income and consumption are expected to have risen by 0.5%.  Income is lagging behind inflation, and he real drop in income may cap consumption.  The headline deflator, which the Fed targets is forecast to rise by about 0.6% to lift the year-over-year rate to 6.4% from 6.1%.  The core measure, which gets plenty of airplay but is not targeted, is expected to rise to 5.5% from 5.2%.  Although the Fed does not target the CPI measure, its earlier release steals the thunder from the PCE deflators.  The weekly jobless claims fell to a new low since 1969 last week.  A small tick up that is expected today will not change views of the strength of the US labor market. The median forecast in Bloomberg's survey sees March nonfarm payrolls rising by 490k.  

Canada reports January GDP.  A 0.2% gain is expected after a flat December.  The report is too old to have much market impact.  Earlier this week, the swaps market appeared to have a 50 bp hike fully discounted for the April 14 Bank of Canada meeting.  It has slipped to about a 66% chance now.  Mexico reports worker remittance tomorrow, which has been a surprisingly strong source of hard currency.  Later today, Colombia is expected to hike its overnight lending rate by 150 bp to 5.50%. Consumer inflation is running a little north of 8%.  It last hiked by 100 bp in January.   The swaps market has about 500 bp of tightening priced over the next six months.  

The Canadian dollar and Mexican peso recorded new 2022 highs yesterday.  The peso made a marginal new high today, but both are a bit better offered now.  The US dollar is at a new three-day high against the Canadian dollar near CAD1.2530.  There may be some resistance in the CAD1.2555 area, but the potential may extend toward CAD1.2580-CAD1.2600, if not today, then tomorrow.    Recall that the peso began this week with an 11-session rally in tow, the longest in half a century.  Even with the small loss today, it is gains 13 of the past 15 sessions.  The MXN20.00 area, which previously offer the greenback support now may serve as resistance.  


China's PMI Disappoints, US getting more Serious about Deploying SPR China's PMI Disappoints, US getting more Serious about Deploying SPR Reviewed by Marc Chandler on March 31, 2022 Rating: 5
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